What To Consider Before You Cancel Your Credit Cards

Not that long ago, I was pretty fastidious about how I had my financial accounts set up, so much so that I was bent on consolidating everything from bank accounts to mutual fund accounts to credit card accounts. Little did I know that there are consequences to being so gung-ho about organizing, simplifying and downsizing everything. This is because credit card accounts shouldn’t be treated like clutter. You can’t just think about doing away with them without giving it some careful thought.

At one point, I was in a situation where I pondered about what to do with a particular card. I carried a MasterCard credit card that I’d had for several years and which had an outstanding balance on it (it had been there for some time). But I eventually managed to completely pay it off. I then decided I no longer wanted to use it. So I found myself having no intention of using the card again and thus, I got ready to cancel it with the issuing company.

But before I went ahead with my plans, I studied my options. It helps that I write about a lot of financial matters because I came across information that stopped me from possibly making an error. I realized that canceling my card may not be the best thing to do. It’s a good thing I held off — and here’s why.

Things To Consider Before Canceling Your Credit Cards

If you are thinking about canceling one or more credit cards you’ve paid off, consider the following points first.

1. It can do damage to your credit score.
Your credit score can impact whether or not someone is likely to give you credit in the future. If you get rid of one or more cards, you can actually reduce your credit score enough to squander any chances of getting fresh credit for a while. It can vary between situations and people, but think twice before canceling them.

2. It could harm your credit history.
When we talk about history here, we’re talking about the length of time you’ve owned a credit card. If you’ve carried one for six years, it’s something worth hanging onto: this is quite a long credit history for someone to look back on. But if you’ve only had a card for six months, it gives potential lenders very little to go on. This is why keeping certain cards (such as older cards in particular) can prove to be a very smart decision –- even if you keep them tucked away in the safe.

3. You will have less available credit –- and it could make things look bad.
You may think that having less credit is a good thing and can help you put a brake on your spending habits, especially if you’re one who tends to overuse your credit cards on a regular basis. But you need to think about how future potential lenders will view your situation. Remember that they don’t know that much about you in reality –- they only know what’s on your credit report.

Let’s say you have three credit cards with a credit limit across all of them which totals $15,000. The total amount you owe on those cards is $4,000.

Now let’s say you decide to get rid of two of those cards, and you also decide to keep the main part of the debt on the remaining low interest credit card. This could result in having a total credit limit of a much reduced $5,000. Now suppose you paid off some of your $4,000 debt. Your total amount owed, after paying off $200, is down to $3,800.

Wow –- now things look very different to the potential lenders who take a look at your account. They’ll see that you are using nearly 80% of your available credit, whereas in the first example you were using less than a third of it, even though the actual debt was larger. In this situation, you may want to pause before you cancel your account.

There are also other reasons why you shouldn’t close your account: don’t cancel your card if you’ve got an unpaid balance on it, or if you’ve got no other source of credit (and you know it’ll be tough to get credit any other way).

When Is It OK To Cancel Your Credit Card?

So before you cancel your credit cards, you should sit back and look at the whole picture — both pros and cons — before you make a decision. As you can see from the information above, you might be better off keeping that plastic, but there may also be some situations when canceling cards can be a good thing. So what are those situations? See if any of these conditions fit your case:

If you simply have way too many cards on hand and you’ve decided to roll over some or all of your outstanding balance into a good 0% balance transfer card, then closing some of your extra accounts makes sense.

You want to avoid excessive spending and the temptation to rack up credit card debt. If you have trouble controlling your spending, then canceling your accounts may be a relief.

You want to protect yourself from identity theft and untrustworthy users of your card.

You want to do away with high interest cards or credit cards that have high annual fees. You know you won’t be using these cards anymore.

Bottom line: know all the facts and weigh the good and the bad that come with closing your accounts.

I did cancel my credits and that was a big mistake — I should have cut them or pay them off instead. I am debt free now though!

5.11 tacticalSeptember 15, 2010 at 6:13 am

i have a couple of credit cards that i don’t use, and this post was really informative before i could just go out and cancel them….

PaulSeptember 15, 2010 at 6:41 am

Another reason to cancel you credit card is when the bank tries to blackmail you with higher interest rates. I had a CC with a $25K LOC and a moderate balance. The bank decided last year to triple my interest rate if I wanted to keep the card. If I canceled the card I could continue to pay the balance at low interest rates. So it was a no brainer that I cancel the card. It hurt my credit score but I’m not borrowing any more money so no big deal.

ConsumermiserSeptember 15, 2010 at 9:51 am

Nice article. I agree with your thoughts.

Generally, I also recommend NOT closing a credit card account because of the credit score hit (and to a lesser extent, your need to access at least 1 card for certain transactions or emergencies) unless you have extremely compelling reasons to do so such as no discipline to keep yourself from using them unwisely.

Other compelling reasons to close an account and how to manage them:
As for cards with high balances, try to negotiate a change to your credit card account by going with a higher rate in exchange for the removal of the annual fee. Regarding ID theft, this is a tough one to manage, but you might be able to solve it by putting a freeze on your account. This will also solve any discipline and spontaneous spending problem since your card in your wallet will not work unless it is unlocked by you by contacting the credit card company. Also consider filing your cards away in a locked file, safety deposit box, cutting them up or freeze them in a block of ice. Now, if you want to use your card(s), you have to go through an extra step or contact the credit card provider to get a new card.

Excellent thoughts Paul and ConsumerMiser! It may feel a little counter-intuitive to keep around credit cards that are not going to be used much or to keep open accounts when they are virtually inactive. But it functions like a form of insurance for those who believe they’ll need credit in the future. It takes a bit of forward thinking to be comfortable with this idea, I guess. Ultimately, you do what is most comfortable to you. Some people just decide to swear off credit cards once and for all and close off all their accounts as a commitment to never take on debt again. In my case though, I say “never say never”.

BoggodSeptember 17, 2010 at 5:22 am

When I cleared off all my debt, I canceled my card of almost 10 years as matter of principle. All the points you bring up are true, but I decided that I should just avoid dealing with people or services that rely on my credit score or available credit as a means to judge my reliability. I can’t help but believe that our the credit scoring system is a deliberate way to prop up the debt industry, and know that, out of those things that require it, there is literally nothing that I cannot live without.

Katy LawyerSeptember 18, 2010 at 1:29 pm

Be careful with cutting up cards because it can really hurt your “overall credit picture” even if it doesn’t necessarily hurt your credit score. Putting an online alert and keeping it open might be a good idea instead.

Chevy GuySeptember 18, 2010 at 1:58 pm

I hate the credit scoring system. It seems rigged to keep us in debt. That being said, over a course of time I have been able to reduce my debt, reduce the number of credit cards I have, and maintain my credit score. If I remember correctly there is a ratio of debt to available debt that effects the score. So, if you can reduce your cc debt by $1,000 it’s probably ok to close out a card with a $1000 limit.

NinaSeptember 18, 2010 at 4:05 pm

Excellent info, most consumers don’t know this but find out too late…like when they are going to purchase a home. As you said, they think they are doing the right thing & end up doing the opposite.

Alish HoustonSeptember 21, 2010 at 9:17 am

Excellent informative post and sounds really really interesting. Recently, I cancelled my credit card but that was the biggest mistake I ever did. After reading your article, I should have cancelled the credit card. You have provided some great tips about it. Also, some great tips by “Consumermiser”. This is really a nice discussion. Thanks for sharing your tips. 🙂
Cheers!
ALISH 🙂

saveasibuySeptember 29, 2010 at 11:32 am

Nice post. As I initially read it, I was second-guessing myself that maybe I shouldn’t have canceled my card since I’ve had it for some time with no balance. I struggled with this for awhile before pulling the plug. But by the end of your post, #4 was the reason I did. The bank put an “across the board freeze” on any negotiation with interest rates. So closing it after obtaining one with an APR that’s 10% less along with a higher available limit was a good move in my circumstance. I don’t plan to hold a balance, but I realize the value in having the card. Thanks for this — I enjoy your site!

RodSeptember 30, 2010 at 5:06 am

We no longer use credit cards at all. We follow Dave Ramsey’s envelope system.

Last summer I signed up for a bunch of promotions for rewards up to $500 for credit card signup. The first year was free on most of them, however, now it time to either start paying fees or cancelling the cards.